Archive for the ‘Blogging Piketty’ Category

I’m blogging about listening to Piketty’s Capital on audiobook, page numbers refer to the hardcopy.

This week I listened to chapter 14 on the Progressive income tax – how it came about, what role it plays in preserving equality.

The progressive income tax is an important part of supporting the Social State – we need that much tax and if it’s regressive then Piketty contends that people will find the system unjust and be unwilling to participate. The Social State does require substantial funding, it got close to 50% of total national income at its peak. Folks were willing to move up to that point in the 50s & 60s because everyone was doing well. Further, it was implemented very progressively. “All told, over the period 1932-1980, nearly half a century, the top federal income tax rate in the United States averaged 81 percent.” (p 507) It actually peaked at 88% in 1942, with surtaxes that created a high of 94% in 1944, before falling to the 70% some of us remember. Piketty calls that kind of rate “confiscatory”, and suggests it’s motivated to address “incomes deemed to be indecent (and economically useless)”. (p 473)

Progressive income taxes were introduced right around World War I, and took hold in part because of the huge debts governments ran up in the war and had no other way to pay off. The Bolshevik Revolution of 1917 and worker strikes are also suggested as a factor. The United States actually introduced higher tax rates than in Europe, and Piketty attributes that to a reaction against “the hyperinegalitarian societies of Europe” as well as a response to the Great Depression. (p 506)

In the 1980s the US and Great Britain with Thatcher and Regan began to significantly cut top tax rates. My sense from this chapter is that part of the argument was that Germany and Japan were catching up to us technologically and we needed to get more competitive. That strikes me as a misguided argument now after earlier chapters talked about economic growth as being towards the current “technological frontier”. Rapid growth in the last near-century has been more about recovery from the two world wars than from technological advance and the catch-up of Germany and Japan was inevitable. The fear that they might slingshot past was misguided. Anyhoo, we did cut tax rates.

Piketty describes it thus: “After experiencing a great passion for equality from the 1930s through the 1970s, the United States and Britain veered off with equal enthusiasm in the opposite direction.” (p 508) One consequence? The explosion of CEO salaries. “If we look at all the developed countries, we find that the size of the decrease in the top marginal income tax rate between 1980 and the present is closely related to the size of the increase in the top centile’s share of national income over the same period…. Conversely, the countries that did not reduce their top tax rates very much saw much more moderate increases in the top earners’ share of national income.”

Why? “In the 1950s and 1960s, executives in British and US firms had little reason to fight for such raises, and other interested parties were less inclined to accept them, because 80-90 percent of the increase would in any case go directly to the government. After 1980, the game was utterly transformed…” (p 510)

Piketty continues “there is no statistically significant relationship between the decrease in top marginal tax rates and the rate of productivity growth…” so there’s no evidence that the rise of top salaries is justified. In an earlier chapter he goes into greater depth about the difficulty of rationalizing high CEO salaries, or correlating them in any way with performance when compared with similar companies and similar demonstrable economic performance. It’s all about negotiation. After comparing CEO salary variations across countries he concludes “only dissuasive taxation of the sort applied in the United States and Britain before 1980 can do the job” of reigning in high salaries, not corporate governance reform. (p512).

This section particularly catches my attention because in my own experience as an investor reward is the intersection between luck and motivation to negotiate, more than skill or merit. I have long believed that the only way to keep people from gaming the system is to reduce their incentives to do so. Sounds like Piketty concludes the same thing based on data.

There’s a gag t-shirt that reads “There are 10 kinds of people in this world: those who understand binary, and those who don’t.” The gag being that if you understand binary numbering you immediately realize that “10” is written in binary numbering and therefore reads as “two” not “ten”. I feel a little that way talking about Piketty’s Capital. Since I work in finance, it sometimes seems like “everybody” will immediately recognize it as the most influential book on economics since Smith or Marx. But I’ve been spending time with folks outside of that community lately and running into more people who say “Eh?” Which stops me a little short.

SO, Le Capital au XXIe siècle, by French economist Thomas Piketty was published in August 2013 in France. The English translation by Arthur Goldhammer, Capital in the Twenty-First Century, came out in April of 2014. According to Wikipedia it’s the best selling book ever from Harvard University Press. It’s been #1 on both the New York Times nonfiction best seller list and the Wall Street Journal best seller list. I was gifted with my copy last year by Matt Talbot of Bristlecone Advisors. Seattle University just started a 6 week (spread out over 12) special seminar with talks from 6-9 on weekdays and it sold out, I couldn’t get in.
It’s a tome for sure – 577 pages, footnotes round it up to 655. In July of 2013 a math professor from the University of Wisconsin did an amusing analysis (published as a WSJ essay) of the distribution of reader highlights in Kindle editions of best-selling books. He used it as a metric for guesstimating whether or not people are finishing the books. If everyone is finishing the books, presumably there will be popular highlights throughout the book. At the time, all top 5 “popular highlights” of Kindle readers were in the first 26 pages of Piketty, earning it the label of the least-read best selling book. But hey, it had only been out 3 months and it’s over 600 pages! I don’t have it on Kindle so I can’t check but I bet it’s better now. There are also no end of derivative analytical summaries out there.
I’ve been listening to the audiobook, actually, and it’s great! Piketty refers to lots of charts and graphs so one might think I’d miss a lot, but actually I think I’m getting a much better “read” this way. For starters, I’m a fast reader so audiobooks really make me slow down and get everything. Piketty is also a good writer – he’s really good about telling you what he’s going to tell you, telling you, and then summarizing in conclusion. He explains all the charts and graphs so while I’m missing some, it’s not much. And this really is pretty interesting stuff to me so I’m good about skipping back and re-listening. The first couple chapters laying groundwork were a little dull but it’s been fascinating stuff since! The narration is excellent, L. J. Ganser- I’m your fan! The audiobook is 24 hours long and I’ve been getting in in 1 hour doses on a commute, so I end up really thinking about small sections at a time.
I want to blog about it, I’ve been daunted. But it’s time and it’s what will really help me process what I’ve been hearing. This book blows my mind – it really seems to me that the Occupy movement is based on it. Then the push to blow up individual political contribution limits in the US from like 30K to 300K is a countermove that Piketty practically suggests! As someone who has been a philanthropist working on issues of social and economic inequality for the last decade, Piketty is revolutionizing my thinking about how to measure it and how to address it. I need to process and I need to write. You can help by bugging me to do it!